Carriers Should Keep Up with Cloud Computing Advances, Challenges

CIOs looking to improve efficieny and cut IT costs should stay current with the benefits and challenges of cloud computing, asserts Tom Pettibone, Founder and Managing Partner, Transition Partners.

As we endure the current economic climate, a central question in insurance company conference rooms is: How can we cut costs without sacrificing value? When formulating the answer, it is common to assess IT operations because IT spending in the insurance industry is relatively high. After all, carriers must process and store astronomical amounts of data. But given the industry's reliance on that data for competitive advantage, now is not the time to sacrifice performance.

Cloud computing, though in its infancy, may prove to be a solution that can cut costs and increase efficiency and agility when implemented correctly. Given the economic conditions and the cost-saving opportunities, use of cloud computing could double over the next two years. According to IDC, cloud services will make up 25 percent of the new growth in IT spending by 2012, indicating that cloud computing is the next big thing.

Sunny Forecast

The economics of cloud computing are similar to that of outsourcing. While there is an up-front cost of conversion, in the long term a company can save 20 percent or more of overall IT costs by employing cloud solutions. Regardless of the economic climate, it is imperative for insurance companies to experiment with the technology.

The first cost benefit of cloud computing is straightforward. Insurance companies rely heavily on their data centers, in which all the hardware, software, storage, network and backup equipment is housed. Data centers alone -- the physical space, power and licensing fees -- account for a significant chunk of IT spending. While today large, well-run data centers can be as cost-effective (or maybe even less costly) than the cloud, cloud computing has the potential to alleviate data center costs for many insorance enterprises.

Many cloud computing models are based on the utility concept, allowing companies to pay only for the services used as opposed to the fixed costs of data centers, license fees, surge capacity and disaster recovery, for example. The cloud houses information and services for many companies and the costs are shared among them.

Additionally cloud computing might reduce the need for investment in new systems. If a CIO can migrate certain operations or functions to a cloud or software as a service (SaaS) model without the need to write new systems, all the better.

A corollary benefit is that for certain applications there is no lengthy procurement process. Application development can occur faster because the infrastructure, platform and middleware already resides in the cloud. Applications can be prototyped with little up-front cost and then abandoned if proven unsuitable.

Further, big changes in compute-demand resulting from catastrophes, marketing promotions, seasonality or acquisitions can be rapidly accommodated without the build-out and recurring overhead of reserve capacity. According to Forrester, at many financial firms, 25 percent or more of network servers are unused.

Despite the promise of cloud computing, it is nascent with some challenges. While the cloud is ready for development, with the exception of certain SaaS applications, it's not ready for production.

Some of the concerns for CIOs include:

• Security, Privacy and Controls. There have been privacy breaches in cloud computing that are simply unacceptable. Additionally, in the cloud applications and data may be moved from country to country unbeknownst to the owner. You can't audit what you can't see.
• Vendor and Infrastructure Lock-In. Once you elect to move to a proprietary cloud environment, it can be difficult to exit.
• Data Access. In one reported case, the cloud vendor could not provide the schema of, or access to, a global consumer goods company's data.
• Bootleg Applications. Individual users often can contract directly with the cloud host and develop applications without the knowledge of IT. Eventually, however, that functionality and data must be integrated with legacy data and systems, which often is a very messy affair.

Because the potential cost advantages and agility of cloud computing are so compelling, however, in time these concerns undoubtedly will be overcome. And although we are seeing growing pains that come with any new business/technology approach, Gartner predicts that the cloud computing market could grow 21 percent in 2009 to $56 billion.

Even in this economic climate, cloud computing continues to grow, and CIO's must stay current with cloud developments and adjust their plans accordingly. After all, with budgets constantly being cut and IT demands escalating, cloud computing is rising as a necessary tool to increase efficiencies and lower costs while retaining company value.